Heat Map for a Response Framework

With the disruption these days cause by COVID-19, we all live unprecedented times. The new environment has put a strain on our personal and professional life, making everything seem so surreal. The problems of yesterday have been completely wiped out by a new, more basic concern: how to survive? And if at individual level, the message is quite simple: stay home, for the companies this task is way more complicated.

So, this is an attempt to gather as much info to compile a “heat map” for the companies, a response framework to navigate these difficult times. These are some recommendation of action for short and medium term.

Part 1 - Reassessment of financial standing

Determine impact of late collections:

- analyse pool of clients to understand degree of dependency (% of sales)

- apply stress scenarios to extend collections with 30-60-90 days and calculate impact on cash (no of days extra x company's yearly turnover / 365 = extra need of cash)

- apply probability scenarios for clients going out of business and not paying at all and calculate impact on cash

Determine potential of late payments:

- suppliers: attempt to renegotiate payment terms - in mirror with the cash pressure from clients (positive impact on cash = no of days extra x cost of goods sold / 365)

- state debts: apply for postponements

Assess the bank financing

- understand which credits are committed and which are uncommitted, i.e. can be withdrawn by the bank (NB! Overdrafts, credit lines, credit cards are usually uncommitted)

- understand which are the contractual responsibilities and what happens if your company is breaching financial ratios imposed (penalties vs. default)

- approach bank with alternative scenarios to discuss keeping existing lines and not accelerating debt payments

- prepare to offer extra collateral as a sweetener for the negotiation with the bank

Active cost management:

- postpone as much the scheduled investments which are not critical to the survival of the business (i.e. change of premises, change of office equipment, change of cars, refurbishments, etc.)

- postpone costly launches of new products, unless they will have an immediate proven contribution to the business increase

- decrease spending overall, unless critical: i.e. marketing, event organizing, salary increases, bonuses, new employees etc.

Active shareholder contribution:

- postpone shareholder payments or dividend distribution

- seek for additional shareholder contribution (in kind or to provide collateral for bank financing)

- seek for additional funding from shareholder (if available)

The impact of current crisis will most likely be felt for months and even years to come, however if companies will move quickly to understand their strengths and act on their weaknesses, they will manage to also see opportunities. The recommendations in this article represent an important first step—one that could minimize damage. A follow-up article will address in a few days the remaining critical areas: supply chain, markets, products and employees.